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Does Being Unethical Pay?

In case you came to work today with nothing better to do, let’s chat about ripping off your customers. Not that I’m implying any of my dear readers would do such a thing, but let’s say your evil twin decided to put his toe to the edge of the slippery slope and flirt with some unethical, immoral and perhaps even illegal business practices.

The question is this: Even if you put your whole universe on the line to squeeze a few extra thousand dollars out of homeowners’ contracts—as was the case with a dealer I cite below—or get creative with your numbers to make your financial statements a little prettier for your loan officer, does it even matter?

There are two schools of thought when it comes to shady accounting and business practices. One contends that attempts to make “cosmetic” improvements to the financials have a real impact on the wealth of the individuals involved with the company. I call this the school-of-hard-knocks theory. It’s hard to argue the apparent benefits of being unethical, when hidden fees tacked onto a sales contract put an extra thousand dollars in the coffers, or when making a temporary “sale” to your biggest builder with a wink and a handshake—knowing full well the items will be “returned” later—boosts revenue and the company’s paper profit, enabling you to secure a lower rate on that loan you need.

So, point #1: Observation says being unethical works.

But let’s explore for a minute the other side of the equation, what I call the yes-the-world-is-round notion. As kids, we figure the flat line of the horizon makes it a safe bet to guess the world is flat. Eventually, however, we’re exposed to the science behind it all and, slowly, we come to understand that the photos in our textbook taken from space give us the bigger picture of a round Earth. In that context, let me tell you this, Mr. Columbus—the science says being a crook doesn’t pay.

Economic and accounting gurus are attempting to let all of us evil laypeople know that markets are efficient and that the economic consequences we think exist—the reasons we would be so daring as to make cosmetic adjustments to our financial statements and sales contracts—really don’t. There is a significant and growing body of evidence in the scientific literature of accounting and economics that supports the existence of efficient markets.

Point #2: While we’ve been out selling windows all day, the academic community has figured out that being unethical doesn’t work.

Essentially, the marketplace is smarter than we are. Researchers are saying that our creative dance steps to make financial statements look better for loan applications or raise our stock prices are a waste of time. The world is round, and the marketplace will eventually see through our attempts to make our companies “look” better.

The following are not really examples of one side or the other, just food for thought following the dose of accounting theory you just took.

There’s a brouhaha in Detroit right now about a Renewal by Andersen dealer that allegedly has been pocketing permit fees and padding sales contracts for about eight years. A big legal smackdown is pending, and Andersen’s corporate officials have taken the reins of the location until the smoke clears, according to news reports. While initial reports peg the owner and involved salespeople as walking away with between $5 million and $15 million in bogus markups, the marketplace suffered these inflated prices for nearly a decade before a whistleblower uncovered the scheme. Is this observable evidence that shady business practices work?

Ace Hardware is trying to unknot a five-year-old inventory mess, which I should quickly point out is believed to be a significant accounting error and not anything evil coming from the management. Ace managers discovered about $150 million less in inventory than what was recorded on the books. This led to higher dividend payouts for the owners for the past five years, but because of the discovery, will likely result in little or no dividend payout this year to make up for the loss. Did that phantom $150 million make Ace look better for five years, or is the market efficient enough to see through the mistake?

You’ve got me. I’m still trying to figure out how the world could possibly be round. But if you believe in efficient markets, it may be best to lock up your evil twin at home. Contact Christina Lewellen, senior editor, at clewellen@glass.org.